There are many reasons not to carry credit card debt. The most obvious is that it’s really expensive. And here’s a reason often overlooked: It seems so much harder to work for money you’ve already spent.
But what if you do not carry any credit card debt at all? There are some who would say it is perfectly reasonable to use credit to pay for everything, provided you are able to pay it back down to $0 during the grace period.
Sure, that makes for easy record-keeping, plus all those points, miles and cash rewards that many credit card issuers offer. Even so, it’s a habit that can have a negative effect on your financial situation.
You need to kick the credit card habit for these simple reasons:
YOUR CREDIT SCORE
The more you use your cards, the more likely you are to make a mistake. All activity — good or bad — is reported to the credit bureaus and lands in your credit file. That information is then compiled into a three-digit number that can change daily — and be used to determine how much interest you will pay on your mortgage, what your insurance premiums will be and even if you’ll get the apartment or job you’ve applied for.
Credit scores — like it or not — have become a kind of character reference. If your score could use a little help, kick the credit card habit and your credit score is likely to improve all on its own.
According to Credit Karma, “FICO score ranges vary — they can range from 300 to 850 or 250 to 900, depending on the scoring model — but higher scores can indicate that you may be less risky to lenders (and others).”
To get a rough idea of your FICO credit score, you can use the FICO Score Estimator. The calculator is free. Or you can purchase your credit score from https://www.MyFICO.com. On the FICO score range, anything over 740 is good. Higher than 760 is great.
One study from the Institute for Research on Poverty and the Center for Financial Security at the University of Wisconsin-Madison shows that people with credit card debt and overdue bills are much more likely to experience symptoms of depression than those who don’t have such debts, particularly if they are near retirement, unmarried or less educated. The more short-term debt a person had, the more frequently they reported feeling those symptoms.
No surprises there. The effects of credit card debt can be debilitating, if not devastating. But the good news is that kicking the habit allows you to retrace your steps and work your way out of debt. Each repaid debt returns your options. And once out of debt, your peace of mind will return as well. It’s not impossible.
In fact, thousands reading this right now have done that using the system I created and you can use. Look for the “Rapid-Debt Repayment Plan” in chapter seven of my book “Debt-Proof Living.”
A study from the Massachusetts Institute of Technology called “Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay” establishes the fact that people who pay with plastic just spend more — whether it’s a soda machine with a credit card slot or a great sale at Target.
If you’re paying with plastic, you just feel freer at the moment to load up the tab. But kick the credit card habit, and leave the plastic at home; you will spend less. That means more cash in your pocket.
It’s become the popular thing to tap into one’s home equity by way of a home equity loan or refinance to pay off credit card debt. But that’s just a way of moving that debt to one’s home. The homeowner-borrower puts his or her home at risk should something happen that makes it impossible to keep up with those new, big monthly payments.
Even worse, perhaps, most people who pay off their credit cards turn around and run them back to the max within just two years, getting themselves into double trouble.
Kick the credit card habit and you won’t be tempted to tap into this appreciating asset to pay for stuff you charged a long time ago and possibly don’t even remember now.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, “Ask Mary.” Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book Debt-Proof Living.